What is a growth investor?
This type of investor seeks high capital gains and is always after the next big thing. They want to find companies that will experience faster than average growth as measured by revenues, earnings, or cash flow. And they’re often on the lookout for companies that aren’t paying out dividends but ploughing all their profits back into the business for sexy acquisitions and cutting-edge research.
However, it’s important to note that growth investors come in many flavours, from those with an eye on the next big upswing so they can sell and take home a handsome profit, to the other end of the spectrum, whose members adopt a more conservative approach and believe that a solid, growing stock can always have room to go even higher and so is worth keeping hold of.
Even if a stock is highly valued, and so something a value investor would typically avoid, if the growth investor believes that its value will still increase, they won’t hesitate to buy it.
The companies that a growth investor will typically target can be goldmines – think of the likes of Microsoft, which, in its early publicly traded days, created millionaires as though it were a bad habit. However, a growth story such as this is rare and to invest like this invites an enormous amount of risk.
A lot of growth investors look at start-up or early-stage companies. These were once a bit of a closed shop, available only to those in the know and with the right contacts. However, the market has opened up considerably thanks to websites such as Seedr and Crowdcube. These sites allow people to invest in start-ups for as little as £10. The investment opportunities on offer are varied and can be quite imaginative, and if nothing else it’s worth browsing them from simple curiosity.
If you’ve noticed that value and growth investing have a lot in common, you’re not the first – legendary investor Warren Buffett stated that the two approaches are “joined at the hip”.
Famous growth investors
Philip Fisher is a name you may recognise from Fisher Investments, a company started by his son, Kenneth Fisher. Fisher senior wrote a book called ‘Common stocks and uncommon profits’ in the 50s, which became an immediate hit. Some of his sagacious sayings include:
- “Doing what everybody else is doing at the moment, and therefore what you have an almost irresistible urge to do, is often the wrong thing to do at all.”
- “I don’t want a lot of good investments; I want a few outstanding ones.”
Thomas Rowe Price, Jr. was the founder of investment firm T. Rowe Price Associates. He is known as the father of growth investing. Among a number of his innovations and ideas, he developed the idea of charging a fee based on assets under management rather than charging a commission, thus intertwining the success of his firm to that of its portfolios. He was known for his flexible, progressive attitude to the business world, and some of his quotes certainly reflect this mindset:
- "Change is the investor's only certainty.''
- “No one can see ahead three years, let alone five or ten. Competition, new inventions – all kinds of things – can change the situation in twelve months.”
- “It is better to be early than too late in recognizing the passing of one era, the waning of old investment favourites and the advent of a new era affording new opportunities for the investor.”
Fund managers with a growth philosophy
Today fund managers who follow a growth philosophy include Giles Hargreave, who manages the Marlborough UK Micro Cap Growth fund and Nigel Thomas, who oversees Axa Framlington UK Select Opportunities. As their names suggest, both of these funds concentrate on UK companies.
While growth funds are expected to offer the potential for higher returns, they tend to be riskier than value funds. When the stock market is rising, they tend to do better than other funds, but during market falls they tend to do worse.
So to invest in a growth fund you need a high tolerance for risk and a long time horizon.
This is a hands-on approach that requires you to know how to analyse a company and the market it trades in. The pros of successful growth investing include the potential for massive profits and the excitement of seeing small companies explode into ones that hold real significance to the economy and, sometimes, our culture. And of course, the cons are just as potent: The risk of losing your investment is considerable and, if you choose to go for pure growth, the lack of dividends can feel like a sucker-punch too.
If having a go at this type of investing does appeal, make sure you’re prepared to lose the money you’ve set aside for it. Look at it as a hobby, something to sit alongside a more conservative investment strategy.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.